Friday 29 Mar 2024
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(May 19): Resilient 1Q GDP growth (+5.6%) does not reflect underlying weakness and vulnerabilities. We expect a more pronounced slowdown in subsequent quarters, with consumer spending and exports seeing a more significant fall. Investment spending will also likely moderate as the oil & gas price shock and tighter fiscal finances delay projects. The recent oil price rebound is providing some short-term relief, but the rally is unlikely to continue. High leverage at the household, quasi-public and corporate levels will compound the risks from a slowdown. High external debt and low FX reserves cover to short-term external debt will likely exacerbate currency swings and vulnerability. Political tail-risks are fat and rising, with Merdeka polls showing Malaysia’s Prime Minister Datuk Seri Najib Razak’s (PM Najib’s) support falling to near alltime lows.

First, consumer spending will likely fall off quite sharply in the second and third quarter, in the aftermath of the GST introduction on 1st April. Such a correction post-GST was also seen in Japan & Singapore, with private consumer spending dropping 3 to 4 percentage points, following a surge pre-GST. Private consumer spending accelerated to a strong +8.8% in 1Q (from +7.6% in 4Q), boosted by front-loading of purchases prior to introduction of the 6% GST. The MIER Consumer Sentiment Index reflects this imminent weakness, having fallen to near five-year lows. BR1M and flood relief transfers also supported spending, but this is unlikely to continue.

High household debt (at 85.8% of GDP in 1Q), a property market slowdown and rising unemployment will likely aggravate this weakness. Property prices have started to moderate, declining on an absolute basis since 4Q last year. The job market has also started softening, with the seasonally adjusted unemployment rate rising from 2.7% in November last year to 3.2% in February. The government announced a hiring freeze for civil servants, effective 22 April, to cut operating expenditure. Civil servant emoluments cost some RM60bn annually, about one-third of total government spending. Malaysian Airlines, as part of its restructuring, is cutting 6K employees. Retrenchment has ticked higher in services, construction and mining industries in recent quarters.

Second, falling LNG prices, which track oil prices with a 4- to 6-month lag, will likely worsen the export slowdown. Exports contracted (-2.5%) in 1Q (vs +0.5% in 4Q), hurt by falling oil & gas prices. But LNG exports (-4.7% in 1Q) have not corrected as sharply as crude petroleum (-18%) and refined petroleum products (-38%). The LNG trade surplus, which is about 5.6% of GDP, has fallen slightly to RM15.5bn in 1Q15 from RM15.8bn in 4Q14. We estimate that a 10% decline in LNG prices could worsen the current account by about 0.5% of GDP. BNM, however, argues that after the Fukushima incident, elevated Japanese demand weakened the lag between oil & LNG prices (to 3 to 5 months from 3 months) and correlation (to just 0.4-0.6). According to the statistics department, LNG export prices averaged 14% lower from a year ago in March. That said, electronics exports strengthened in March and recovered in 1Q (+6.9% vs +5.6% in 4Q), offsetting some of the weakness in oil & gas exports.

Third, Malaysia remains vulnerable given high leverage in the system, including household debt (86% of GDP), quasi-public debt (68% of GDP), corporate debt (95% of GDP) & external debt (69% of GDP). External debt in particular nudged higher to 68.7% of GDP in 1Q from 67.6% at end-2014, driven by a +2.2% of GDP increase in offshore borrowings. Foreign reserves, which declined from recent highs of about $132bn (Aug 2014) to $105.8bn at mid-May, can only cover short-term external debt about 1.1 times.

Large potential capital outflows (-RM29.7bn in 1Q) as seen in the balance of payments also demonstrate how volatile flows can dominate and overwhelm any current account surpluses (+RM10bn in 1Q). These large outflows reflect the high foreign ownership of Malaysian assets, particularly bonds, but also the risk of capital flight from domestic residents. Growing political tail-risks given 1MDB and PM Najib’s weakening support could also exacerbate capital flows. The latest Merdeka survey shows PM Najib’s approval rating falling to 44% in January, the second-lowest reading since he became prime minister.

We remain cautious on Malaysia, forecasting GDP growth at +4.6% for 2015 despite healthy growth in the first quarter. The GST distorted and overstated the health of the consumer, which will have to grapple with high household debt, a softer property market and worsening labor market. Exports have yet to fully bear the full extent of the oil & LNG price correction, even with the recent relief from an oil price rebound. The acceleration in private investment will likely not be sustained given worsening finances and profitability. High leverage, political tailrisks and large potential capital outflows increase Malaysia’s vulnerability, in particular to an eventual Fed rate hike, probably in September. We continue to pencil in a 25bp policy rate cut (to 3%) in the second half of the year.

 

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